Chapter 3 overview of the financial system
Download
1 / 17

Chapter 3 Overview of the Financial System - PowerPoint PPT Presentation


  • 209 Views
  • Updated On :

Chapter 3 Overview of the Financial System Purpose of the Financial System Transfer funds from savers to borrowers Savers (lenders) supply the funds, obtaining assets that pay future returns. Borrowers demand the funds, issuing liabilities that require future returns.

Related searches for Chapter 3 Overview of the Financial System

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 3 Overview of the Financial System' - sherlock_clovis


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Chapter 3 overview of the financial system l.jpg
Chapter 3Overview of the Financial System


Purpose of the financial system l.jpg
Purpose of the Financial System

  • Transfer funds from savers to borrowers

  • Savers (lenders) supply the funds, obtaining assets that pay future returns.

  • Borrowers demand the funds, issuing liabilities that require future returns.


Two parts of financial system l.jpg
Two Parts of Financial System

  • Financial markets directly transfer funds from savers to borrowers.

  • Financial intermediaries indirectly transfer the funds by acting as go-betweens:

    • The ultimate savers lend to financial intermediaries, which then lend the funds to the ultimate borrowers.


Key services of financial system l.jpg
Key Services of Financial System

  • Risk-sharing

  • Liquidity

  • Information about borrowers and returns on financial assets


Risk sharing l.jpg
Risk-Sharing

  • Risky assets have uncertain returns due to

    • Default

    • Fluctuating asset prices

  • Risk can be reduced by holding a portfolio of assets; i.e. by diversification.

  • Financial system enables risk to be shifted from those less willing to bear it to those more willing.


Liquidity l.jpg
Liquidity

  • Liquid assets — easily, quickly bought or sold at almost equal prices and at little cost

  • Examples of liquid assets: currency, deposits, Treasury bills, stocks of large companies

  • Example of an illiquid asset: houses


Information l.jpg
Information

  • Financial system collects and communicates information.

  • It is costly for many individual savers and borrowers to do so themselves.


Financial markets l.jpg
Financial Markets

  • Newly issued claims are sold to initial buyers in primary markets.

  • Previously issued claims are resold in secondary markets.

  • Active secondary markets engender liquidity.


Types of secondary markets l.jpg
Types of Secondary Markets

  • Format

    • Auction markets; e.g. NYSE

    • Over-the-counter markets: e.g. NASDAQ

  • Settlement

    • Cash markets; e.g. stocks, bonds

    • Derivative markets; e.g. futures, options


Two types of claims l.jpg
Two Types of Claims

  • Debt

  • Equity


Slide12 l.jpg
Debt

  • Principal and interest

  • Maturity date

  • Term to maturity

    • Short-term:  1 year; money market

    • Intermediate-term: >1, < 10 years

    • Long-term:  10 years

  • Default


Equity l.jpg
Equity

  • Claim to a given share of profits and assets

  • Managers have discretion over how much to distribute.

  • Dividend — the amount distributed

  • Default: debt vs. equity

  • Risk-sharing: debt and equity

  • Capital market: equity plus intermediate- and long-term bonds


Financial intermediaries l.jpg
Financial Intermediaries

  • Collect funds from many savers and transfer the funds to many borrowers

  • Provide risk-sharing, liquidity and information services


Financial evolution l.jpg
Financial Evolution

  • Strong competition

  • Financial innovation

  • Financial integration in US

  • Globalization

    • Recent years

    • Before 1914


Reasons for financial regulation l.jpg
Reasons for Financial Regulation

  • Prevention of fraud

  • Financial stability

  • Monetary control (silly)

  • Willie Sutton effect


Facts for 2006 l.jpg
Facts for 2006

  • 40% of assets were direct debt and equity instruments

  • 60% were liabilities of financial intermediaries of which about

    • 27% in bank deposits

    • 49% in pension reserves

    • 19% in mutual funds

    • 5% in insurance reserves